Retail ERP: Can IT Save A&P?

* Learn how a company in trouble is making all the right IT moves?and may still lose

* Get inside the high-stakes process of choosing key vendors

* Understand unique supply chain challenges facing supermarkets

At the turn of the century, dappled gray horses pulled A&P’s red wagons through the streets of lower Manhattan in a marketing scheme designed to lure shoppers to the store. Decades later one of those shiny red wagons adorns the lobby of the grocery chain’s headquarters in Montvale, N.J.?a nod to the supermarket company’s glory days, but also a glaring reminder of its image as an old-fashioned outfit that has fallen dangerously behind its competitors. While its biggest rivals are benefiting from years of investments in IT and other areas, A&P now faces a life or death test.

The 142-year-old grocer, known officially as the Great Atlantic & Pacific Tea Co., has put its future on the line with a four- year, $250 million systems and supply chain overhaul that will ultimately replace close to 95 percent of its current applications. Saddled with an antiquated IT infrastructure and facing threats from new grocery entrants such as Wal-Mart Stores, discount club stores and convenience stores, A&P had little choice but to take an axto its legacy systems and outdated business practices.

Now, the company faces an uphill battle?and a tide of skepticism from Wall Street investors?as it prepares to implement an ERP-type system it hopes will transform A&P from old-time grocer to a high-tech retailer equipped to compete. "This is virtually ’Bet the company,’" says Nicholas L. Ioli Jr., senior vice president and CIO, who was brought in a year-and-a-half ago to oversee the IT project. "If we’re going to be a player in the industry, we’ve got to leapfrog our competition. We’re talking strategic change."

A&P’s a famous brand?to your grandparents. In 1912, A&P stores instituted "cash and carry" transactions at a time others kept customer tabs. A&P was among the first grocers to make its own products like A&P Bokar Coffee (which Cmdr. Richard Byrd carried on his 1929 Antarctica expedition). The company launched Woman’s Day magazine in 1937. And at its loftiest, A&P’s revenue in 1950 was second only to General Motors. But that was then.

The company has struggled for the past decade to remain competitive with such grocery giants as The Kroger Co., Safeway and Ahold USA, a unit of the Netherlands’ Royal Ahold, posting stagnant sales and neglecting its network of cobbled-together legacy information systems. In the late 1980s and early 1990s, the company made several large, ill-advised acquisitions that put a further drag on profits. In 1998, Christian Haub, the then 34-year-old scion of the family that owns Germany’s Tengelmann Group, which owns 53 percent of the company, took over as CEO. He quickly closed more than 100 stores and opened "superstores" in an effort he optimistically called "Great Renewal." Results weren’t as "great" nor was the "renewal" as swift, as some on Wall Street had hoped, and Haub soon embarked on the plan to overhaul the company’s stumbling supply chain, which was severely handicapped by outdated technology and ineffective business processes.

A&P, which operates 750 stores in 16 states, the District of Columbia and Ontario, Canada, and includes the A&P, the Food Emporium and Waldbaum’s marquees, is far from alone in its decision to invest heavily in IT in an attempt to turn its struggling business around. Other industries, including manufacturing and airlines, are also making full-scale, public efforts to use IT to get closer to customers and Web-enable their supply chains. For the grocery business, which struggles with razor-thin margins and increasing competitive pressures, an integrated, ERP-like system could bring even more marked benefits, Ioli says. Still, A&P’s complex IT plan for the traditionally non-techy grocery industry poses great risk. Those in the industry are watching closely. "If A&P does succeed, it will reinforce the inclination of grocery chains and their senior management boards to bet their thin margin businesses on IT investments," says Greg Girard, an analyst at AMR Research in Boston.

Defying the skepticism, A&P has embarked on a shared-risk partnership with IBM and the Minneapolis software company Retek. While the vendors involved are banking on A&P’s success to further their reputations in the retail sector, the supermarket chain hopes the effort will catapult it from industry laggard to market leader. (see "A More Perfect Union," Page 88.)

Trudging Uphill

When Haub unveiled plans for the IT and business process overhaul he called "Great Renewal II" in March 2000, the response from Wall Street was sharply negative. The company’s stock price, which had long hovered around $20 to $30 per share, began a steep decline, sinking to a 52-week low of $6 per share at the end of December. Wall Street analysts, already disappointed by the pace of A&P’s turnaround, complained that such a heavy investment was taking value away from shareholders by cutting into company earnings and urged investors to hold or sell their A&P shares. "The Great Renewal projects are absolutely needed, but they are significantly late," says Mark Husson, an equity analyst at New York City-based Merrill Lynch, which has a sell rating on the stock. "Every time they take a step forward, they take two steps backward. The management team has missed budgets for 10 years in a row and only recently has senior management been held accountable." Husson added that the company’s share price has taken a beating from weaker-than-expected sales and earnings reports and a propensity to open larger and more expensive stores without guaranteeing adequate returns.

The vote of no confidence didn’t come as a huge surprise to Haub, who prefers the moniker chief culture change officer. "Wall Street is short-term oriented," Haub says. "If you tell them the payback will be visible in 18 months, they’ll say that’s far too long. They didn’t understand how much work the company needed." He adds that A&P should save about $325 million during four years by lowering costs and improving product availability. And pretax operating profits should rise by $100 million per year once the overhaul is complete in 2004. Haub also dismisses suggestions by some analysts that the company might need to look for a global partner, noting that his family’s Tengelmann Group is one of the 10 largest retailers in the world with $25 billion in annual sales. "We’re not interested in selling the company," he says. "A&P has internal potential that we need to realize."

Inside A&P’s wood-paneled campus in suburban Montvale, N.J., 25 miles from lower Manhattan, the mood is resolutely upbeat. Colorful posters with perky slogans like "We’re fresh obsessed" and "The power of one?you can make a difference" cover the walls, and IT executives stroll through cubicles in khakis and polo shirts that are the norm since Haub (or simply Christian as he is known to everyone in the company) took over. "We’re dedicated to proving Wall Street wrong," says Frank Urbaniak, vice president of program management. In fact, Urbaniak says, the negative feedback from Wall Street serves as a powerful motivator. "The lower the stock gets, the more you see [our determination] around here."

Upstairs from the IT department, Ioli sits in his spacious office talking excitedly about the project that he describes as his "biggest challenge ever." As CIO at Citizens Utilities in Stamford, Conn., and Ethan Allen Interiors in Danbury, Conn., before that, Ioli says he specialized in taking companies through "significant transformation and aligning IS strategy with corporate goals and objectives." During his career, he has watched CIOs evolve from operational managers who delivered on promises to strategic partners. "If you’re not aligned with business leaders, you can’t bring to bear the innovation that an enterprise needs," he says.

Still, when a recruiter gave him a call about the A&P job in the spring of 1999, he had some major concerns. He knew that the grocery segment is low margin and highly competitive, and he found after doing some research that A&P had not invested in IT relative to its peers. Most of the company’s applications, which hadn’t been updated in 12 to 15 years, were written in custom code, Cobol and CICS (customer information control system), and 85 percent were accessed through terminals hooked to two IBM mainframes, one in New Jersey and another in Maryland. In an era when some grocery retailers were starting sophisticated customer loyalty programs, A&P had no way to analyze data from customers or suppliers. "We had extremely antiquated systems, from finance to merchandising systems to store and warehousing systems," Ioli says. "There were huge gaps in our data flow and no data warehousing at all."

Retailers like A&P often suffer from vast information gulfs, since disjointed distribution systems mean back-office operations rarely have clear information about what is selling in the stores, says Patrick Mullarkey, partner in Booz, Allen & Hamilton’s IT practice in Chicago. "They lose visibility of the product once it goes into the store," Mullarkey says, adding that Wal-Mart is one retailer that has bucked the trend by driving efficiencies in its supply chain by centralizing its distribution network.

Despite the clear difficulties, Ioli says he took the job because he felt he could work closely with Haub on technology, but also help oversee training and other large-scale change-management programs that go along with such a massive overhaul. "I’m at the strategy table here," says Ioli, pounding his hand on a circular table for emphasis. "He [Haub] understands we can’t transform this company without IT. We’re reinventing the office of the CIO here. It’s not just about IT?it’s about knowledge management and process management. It’s about business strategy."

A Brave New ERP

In his first days on the job, Ioli faced the daunting task of choosing a vendor, or vendors, to help A&P build an ERP system for the grocery industry, where custom code is more the norm. With help from IBM as a consultant, Ioli, Haub and other top executives first considered the best-of-breed approach that would involve buying several off-the-shelf packages for each area of the supply chain. That approach, however, would involve "building a lot of interfaces," Ioli says, noting that speedy implementation was key. While he implemented an SAP system on time and under budget in his previous job at Citizen Utilities, Ioli knew that no ERP vendor provided software designed specifically for the grocery segment, where perishable items must move swiftly through the supply chain, he says. Perishable items such as milk, fruit and meat all have different shelf lives and demand different types of warehousing, complicating the traditional retail supply chain. With milk, for example, it’s important to maintain a "cold chain" throughout purchasing, warehousing and distribution. One break in that chain means the product is lost. Purchasing also becomes more complicated in the grocery industry because items are purchased regionally, nationally and internationally.

While competitors are updating their systems, Ioli calls A&P’s effort "the first attempt to strategically reengineer a company and get as close to an ERP as we can" in the grocery industry. "We believe the technology and functionality will allow us to move ahead of the competition," he says.

A&P chose Retek after bringing a group of vendors together for what Ioli calls a "bake off." A&P vetted the potential suitors around four main categories: features and functions, technology strategy, viability of the company and cost. "We were looking for a core system where all of our item and merchandising information would reside," Ioli says. "We needed functionality around category management, merchandising, procurement, promotion, pricing and forecasting?including the perishable side of the grocery industry."

Retek, a leader in retail software, scored high from a technology perspective since it had experience developing systems for major retailers such as Eckerd and Ann Taylor, as well as some smaller grocery chains in Europe and Asia. Ioli was concerned, however, about tying up A&P’s future with a smaller company, even though there were no signs of trouble at Retek, which posted $69 million in 1999 revenues and was on track to grow last year. "I took a hard look and said, ’Am I going to bet a $10 billion company’s future on a company that small?’" Ioli says. "If they go to a position of vulnerability, we’re very exposed."